ECONOMIC AGENDA: Does Australia export 274 per cent of its wine production?

by Patrick J. Byrne

News Weekly, April 26, 2014

If the headline to this article sounds ridiculous, you are correct.

But this figure is symptomatic of the problem faced by Tony Abbott and Agriculture Minister Barnaby Joyce in setting new policy directions for Australian agriculture from their current inquiry into agricultural competitiveness.

Agriculture Minister Barnaby Joyce.

In recent times, our governments have been told time and again by their various agencies that Australian farmers export 60 per cent of their product. The problem is that, as the following example of wine exports illustrates, they have calculated farm exports using a statistical fallacy.

To explain:

All high school students studying statistics are taught that you can only compare like with like, e.g., apples with apples, and oranges with oranges. But you cannot compare apples with oranges, otherwise you end up with nonsensical conclusions.

It seems that Australia’s leading government agencies that advise our governments on matters of agricultural markets lack this basis understanding. These include the Department of Foreign Affairs and Trade (DFAT), the Australian Productivity Commission, the federal Department of Agriculture, Fisheries and Forestry (DAFF) and the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), which is part of DAFF.

Back in the 1990s, these agencies, along with the National Farmers Federation (NFF), claimed that we exported 80 per cent of agricultural product.

Since then, these agencies and our politicians have presented a confused picture. A few examples:

In 2003, Patrick Secker, then a South Australian federal Liberal MP, told a government inquiry that we “export 80 per cent of our agricultural produce. It is not as if we have a shortage of food here in Australia.”[1]

In 2009, DFAT declared that Australia exported “around two thirds [66 per cent] of total production”.[2]

That same year, the then Labor Minister for Agriculture, Tony Burke, told ABC TV’s Landline program: “We have to remember with Australia, we’re an exporting nation when it comes to agriculture; 60 per cent of what we produce gets eaten in other countries”.[3]

In February this year, the Australian government’s Agricultural Competitiveness Issues Paper, produced for the current agricultural competitiveness inquiry, says that “around 60 per cent of agricultural production” is exported (p.18), and was worth $32.4 billion in 2010–11 (p.9 diagram).[4]

The Productivity Commission has further confused the calculations. In a 2005 paper on Trends in Australian Agriculture, it declined to estimate an export figure, saying that “the variety of methodologies used to estimate exports (and the assumptions required) means that any estimates of the proportion of agriculture output which is exported, or the relative sector contributions to total exports, will only be an approximation”.[5]

The Productivity Commission was “passing the buck” onto the Australian Bureau of Statistics (ABS), which warned in a 2002 paper: “Analysis of data about the exports of agricultural commodities requires an understanding of the concepts, classifications and methodology.”[6]

Which then poses the question, if the Productivity Commission could not even produce a figure on how much of Australia’s agriculture is exported, then on what basis did it go on to assume that most of Australia’s agriculture is exported, and that future farm policy should be focused on the export market?

Confusion reigns. Yet isn’t it important to know just how much is exported by a major sector of the Australian economy?

The Australian Farm Institute tell us, in a detailed 2004 study, that agriculture and its dependent input and output industries are worth 12.2 per cent of the Australian economy, and employ over 17 per cent of the labour force.[7] That’s much bigger than Australia’s entire manufacturing sector.

Consequently, shouldn’t the starting point of policy be a clear understanding of what is the biggest and most important market for agriculture and its dependent industries?

How is it that our government is so confused over the relative sizes of the domestic and export markets for agricultural production?

The source of this problem is revealed in the “issues” paper produced for the current agricultural competitiveness inquiry to which we referred earlier. It uses figures from the Department of Agriculture’s publication, Australia’s Agriculture Fisheries and Forestry: At a Glance 2012.[8]

It says that the total value of Australian agriculture in 2010-11, as measured at the farm gate, is $48.2 billion. This included the total value of all farm product as it leaves the farm, before these products are transported, processed, and either sold on into the domestic market or exported. This figure includes the value products such as live cattle, sheep and pigs, wheat, raw cotton, sugar cane and wine grapes.

Then our government agencies calculate the value of exports to be $32.4 billion, to determine that “60 per cent” of agriculture is exported.

What do our government agencies include in agricultural exports? They add together:

• The value of wheat on the docks, after it was valued-added by transport and storage;

• Beef, veal, sheep meat and pork, after they were value-added at the abattoirs where livestock is processed, packaged, stored then transported to the docks, after leaving the farm;

• Cotton, cotton seed and cotton-seed oil, which are products derived from cotton being ginned and cotton seed being processed and stored, then exported;

• Raw sugar, which is milled from sugarcane produced on the farm; and

• Wine, which is more than six times the value of the wine-grapes produced by farmers.

Herein lies the problem. It is a statistical fallacy to compare the value of processed products exported with the value of unprocessed products at the farm gate. This is like comparing apples and oranges.

To gain a further insight into this problem, let us look at what happens when we apply this faulty statistical analysis to the grapes and wine industry.

In 2010-11, the value of wine grapes was $712 million.[9] The export value of wine made from these grapes was $2.0 billion.[10]

So what percentage was exported?

Using the method adopted by our government agencies, wine exports are calculated by using the value of exports over the value of wine-grape production — that is, 274 per cent!

Ridiculous? Yes.

Let’s look at a second example. Consider what happens if we use the same flawed method used by our government agencies, this time to calculate the value of agriculture sold into the domestic market.

The value of raw farm product at the farm gate — such as wine grapes, wheat, raw milk, live cattle, sheep and pigs — comes to $48.2 billion.

According to the ABS, after processing this food, Australians in 2009-10 spent $124.5 billion buying food and beverages,[11] after allowing for about $11.3 billion of imports.[12]

This figure, which calculates what Australians spend on food, includes the value of wine from wine-grapes; bread from wheat; cheese and yoghurt from milk; and processed beef, lamb, mutton and pork products from livestock sold at the farm gate; etc.

By comparing the value of all these processed food items that are sold to Australian consumers with the value of the raw foods sold at the farm gate, we calculate that 258 per cent of agriculture is sold into the domestic market!

Clearly, this is a fundamentally flawed methodology.

So how can this problem be fixed?

In May 2000, economists working in the area of agricultural and regional economics, and three officials from the ABS, met in Brisbane’s old Customs House to solve this problem. On May 9, they issued a joint statement called the Customs House Agreement,[13] which declared that direct exports from the farm gate “were 22 per cent of the gross value of production” (that is, comparing apples with apples) and that exports at first-stage production, such as sugar cane turned into raw sugar, “accounted for about 25 per cent of exports” (that is, comparing oranges with oranges).

Further, they said, the 25 per cent export figure had “been essentially unchanged for 30 years or so” and that “the ABARE and NFF (80 per cent) export figure has no basis of fact”.

Today, our major government agencies claim that 60 per cent of agriculture is exported. This figure has no more validity that the 80 per cent export figure they were claiming in the 1990s.

Consider our Commonwealth government to be like a big multinational company managing policies that determines the profitability of thousands of small companies (farmers) that produce $48.2 billion worth of raw product. That product is then processed into goods worth about $156 billion to the Australian economy. Together, farmers and their dependent industries employ 17 per cent of the Australian labour force.

Surely managing such a huge sector of the economy requires first that the government establishes what are the relative sizes of the export and domestic markets.

Could you imagine a big Australian multinational mining company thinking that its biggest buyer was, say, New Zealand, when in fact it was China?

Misunderstanding the primary market for Australian agriculture has led to a whole range of other misconceptions about agriculture and led federal and state parliaments into policies that harm rather than help our farmers.

For example, we are told that because we export twice as much as we consume off the farm, that we in fact feed 60 million people. But do we really do so if we export only about 22-25 per cent of our agriculture?

Further, federal and state government are focused on building our export markets for agriculture. That is fine, but shouldn’t there now be a much greater focus on policies for the domestic market, if in reality 75-78 per cent of agricultural product is sold into the domestic market?

To that end, shouldn’t there be more concern about halting dumped imports and about the ever-growing concentration of economic power wielded by processors and supermarkets compared to the diminishing ability of farmers to collectively bargain a price for their product?

Getting the figures right on Australia’s export and domestic markets will yield benefits to farmers, consumers and governments.

For example, if we export only 22 per cent at the farm gate, then it will require much less investment to double farm exports than if we were exporting 60 per cent of agriculture.

Getting the policy settings right is important to restoring farm profitability. That will then attract more investment into agriculture, boost profits, reduce burgeoning farm debt, and raise more tax revenue for governments.

Finally, agriculture is a high-risk industry that is a major contributor to the Australian economy.

It is much easier to manage these risks if the primary market for agriculture is the domestic market.

This is because governments have a wide range of policy instruments to manage risks in the Australian economy, but very few policy instruments to manage risks on world commodity markets.

In conclusion, a sounder methodology for calculating the true value of agriculture into the domestic and export markets is available to our government agencies in order to help governments develop new and better policy direction for Australian agriculture.

The current inquiry into agricultural competitiveness is an important opportunity to adopt that methodology and, from there, to recognise the opportunities the will benefit farmers, consumers and governments by getting future policies aligned more with the domestic market for agriculture.

Patrick J. Byrne is national vice-president of the National Civic Council. A slightly shorter version of this paper appeared in the printed edition of News Weekly.

Endnotes

[1] Patrick Secker MHR, House of Representatives Sanding Committee on Agriculture, Fisheries and Forestry, Sydney, New South Wales, August 15, 2003.